Chapter 03 · Section 3.1
Expiration Profile
You bought this option when volatility was at 25%.
If volatility increases by 10%, how will that change the call's expiration profile?
a) Shift to the left
b) Shift to the right
c) Shift up
d) Would not change the profile
Consider the two components of an option: time value and intrinsic value.
Intrinsic value is a function of the exercise price and the market price.
Time value is determined by the time remaining to expiration and the volatility of the underlying asset.
As a long option progresses toward expiration, time value decreases until, at expiration, the option's value is made up entirely of intrinsic value.
Intrinsic value is a function of the exercise price and the market price.
Time value is determined by the time remaining to expiration and the volatility of the underlying asset.
As a long option progresses toward expiration, time value decreases until, at expiration, the option's value is made up entirely of intrinsic value.
So - a change in time value would have no effect on the expiration profile of your position.